Appeal from the United States District Court for the Northern District of Illinois, Eastern Division - No. 73 C 2795 ABRAHAM L. MAROVITZ, Judge.
Swygert, Stevens and Doyle,*fn* Circuit Judges.
This interlocutory appeal raises the question whether a federally regulated mortgagee's retention of prepaid interest at the time a loan is paid in full in advance of maturity constitutes a "prepayment penalty" within the meaning of 12 C.F.R. § 545.6-12(b).*fn1 The district court held that defendant had exacted such a penalty and, therefore, sustained plaintiffs' complaint seeking a recovery of $36.25 for themselves and comparable amounts on behalf of "thousands" of similarly situated persons.
In 1966 plaintiffs borrowed $22,000 from the defendant, a savings and loan association regulated by the Federal Home Loan Bank Board,*fn2 to help finance the purchase of a home. The promissory note, which was secured by a mortgage on the home, provided for repayment in installments of $136 payable on the fifth day of each month commencing on May 5, 1966. Each installment payment was to be applied first to interest and then to principal.
The portion of each payment attributable to interest was determined as follows. On the first day of each month interest for that month was added to the principal balance; the amount to be added was 1/12th of the annual interest rate of 5 1/2% times the loan balance as of the last day of the preceding month.*fn3 Thus, the balance on plaintiffs' loan on May 31, 1973, was $18,253.88; the June interest amounting to $83.66 (computed by multiplying the balance by.055 and dividing by 12), was added to that balance on June 1. The payment of the regular $136 installment on June 5 thus covered the June interest charge and reduced the principal balance by $52.34. Since the June interest was fully paid on the fifth of the month, it was "prepaid interest," that is to say, interest which was paid before it was earned.
The note provided that it might be prepaid in part on any payment date or in full at any time. Except for certain circumstances not relevant to this case, the note contained no express provision for any extra charge or penalty in connection with prepayment.*fn4 The note is silent with respect to the borrowers' right, if any, to recover prepaid interest which is not earned.
In this case, after making their regular monthly payment on June 5, 1973, the balance due on plaintiffs' loan was $18,201.48. They were then entitled to retire the loan by paying defendant that amount, plus a fee of $25 for a deed releasing the mortgage. They did so on June 21, 1973, and defendant thereafter released the mortgage and cancelled the note.
Contending that defendant was not entitled to retain any interest attributable to the period after the note was paid in full, plaintiffs requested a refund of the portion of their June monthly payment that represented interest for the 13-day period from June 22 through July 4, 1973.*fn5 The request was refused and this litigation ensued.
Plaintiffs' complaint is in four counts. Count I alleges that the retention of 13 days' interest after payment of the note in full violates a regulation of the Federal Home Loan Bank Board promulgated pursuant to the Home Owner's Loan Act of 1933, as amended, 12 U.S.C. § 1461 et seq. The regulation provides, in pertinent part:
Borrower[s] from Federal associations . . . shall have the right to prepay their loans without penalty unless the loan contract makes express provision for a prepayment penalty. 12 C.F.R. § 545.6-12(b).
Federal jurisdiction was predicated on 28 U.S.C. § 1337.*fn6 Plaintiffs prayed for an accounting of all interest retained by defendant for periods after the full prepayment of any mortgage loan made during the past ten years and for declaratory relief. Count II prayed for an injunction ...